The RBI has stated in the past that it will soon begin working towards the “phased implementation” of its own digital currency
Union Finance Minister Nirmala Sitharaman announced the introduction of a Central Bank digital currency during the presentation of the Union Budget 2022.
“The introduction of a Central bank digital currency will give a boost to the digital economy, leading to a cheaper currency management system. Blockchain and other technologies will be used by RBI to issue the same from 2022,” the Finance Minister said.
The RBI has stated in the past that it will soon begin working towards the “phased implementation” of its own digital currency. In a speech delivered on July 22, RBI Deputy Governor T. Rabi Sankar delved deep into the reasons for introducing a digital rupee and the possible systemic risks posed by such a currency.
A Central Bank Digital Currency (CBDC) is no different from the cash that we hold in our wallets, except that it exists in a digital form. The CBDC will be held in a digital wallet that is supervised by the Central bank. In India, it will be the RBI that supervises the digital rupee although it may delegate some power to banks.
It should be noted that the RBI’s digital rupee will not directly replace demand deposits held in banks. Physical cash will continue to be used by banks, and people who wish to withdraw cash from banks can still do so. But they can also opt to convert their bank deposits into the new digital rupee.
Central banks claim that there is increasing demand for digital currencies, which they wish to satisfy. They point to the rise of private digital currencies such as bitcoin and also to the increasing use of digital payments as examples of this secular trend. Critics, however, note that the demand for private currencies comes primarily from people who have lost faith in fiat currencies issued by Central banks. They argue that governments across the world have been debasing their respective currencies by printing them in excessive amounts, thus forcing many to switch to private currencies whose supply is limited by design.
Central banks also believe that the cost of issuing digital currencies is far lower than the cost of printing and distributing physical cash. The RBI can create and distribute the digital rupee at virtually zero cost since the creation and the distribution of the digital rupee will happen electronically. Another likely reason for the introduction of digital cash may be to bring down the use of physical cash. Unlike physical cash, which is hard to trace, a digital currency that is monitored by the RBI can be more easily tracked and controlled by the Central bank.
Interestingly, CBDCs could eventually take over this crucial role that cash reserves play in the current banking system. This could happen as more and more physical cash gets converted into CBDCs and these in turn are deposited into banks. In that case, the difference between CBDCs and loans created electronically by banks could turn out to be very little as both would simply be digital forms of the same currency. This could eliminate the risk of bank runs as banks will then no longer have to satisfy the cash demands of customers. But it can also lead to rampant money creation by banks since they no longer need to worry about the risk of a depositor run when they create too much money.